Is Bush Tanking Stocks to Grab the Remaining $350 Billion TARP?

Remember the much decried end-of-Clinton- era pardons, the most controversial of which involved tax cheat and storied trader Marc Rich? Well, if I am reading the tea leaves right, those shenanigans pales compared to the nonsense Bush is trying to pull in his last week in office.

Bush is making it sound as if it is imperative that the remaining TARP funds be released, which is justifiable only if there is some disaster in the making that needs to be averted between now and noon on January 20. The only candidate that might fit that description is Citi, and investors obligingly ran the stock down 20% today (it recovered a tad before the close) and took the broader indexes with it.

I am mighty puzzled that the markets are taking badly to the spectacle of Citi hiving off a bit or two of its unwieldy self. We have said repeatedly that propping up the financial services industry in place will impede any economic recovery. It is simply throwing good money after bad. The industry needs price discovery, rationalization, and recapitalization. A Citi tidying-up, or something bigger, is a very good step for the economy as a whole. It admittedly may not be pretty for financial stock buyers who got in too early. However, it is a mistake to think that what is in the best interest of these firms (as defined by incumbent senior management who are wedded to hanging on to turf) is in the best interest of the economy or the stock market ex financial firms (particularly since CEO pay in financial services is directly correlated with bank assets).

I am as bearish as just about anyone, but there is a huge amount of cash sitting on the sidelines right now, and the normal course of events would be a wee bit of a rally somewhere along the line before things go lower (if you are of the “going lower” persuasion, that is).

So why would Bush want to grab the rest of the TARP money now? The only plausible explanation is to block the Obama crowd from imposing tougher standards like – hold your breath – accountability! And he could force a confrontation, which most believe would send stocks even lower. What a nice present for an incoming president.

But Obama is acceding to Bush’s brinksmanship, which is truly disappointing, Unless he is shrewdly trying to engage the Bushies while running the clock out. But it certainly doesn’t look that way.

From the Financial Times:

George W. Bush on Monday agreed to ask Congress to release the remaining $350bn of US bail-out funds, meeting a request from Barack Obama as the president-elect’s team tried to quell opposition to the move among legislators.

Congressional aides said at least one and possibly both chambers of Congress could vote against releasing the funds. The president could veto any disapproval legislation, ensuring the $350bn is disbursed, but such a spectacle would test market nerves and undermine hopes of a strong start under Mr Obama….

Analysts blamed the falls on fears of bad fourth-quarter earnings, a possible forced restructuring at Citi, and the prospect that the Obama administration – under pressure from Congress – would impose harsh conditions on banks receiving further government capital.

Mr Obama told reporters: “It is clear that the financial system, although improved from where it was in September, is still fragile and I felt it would be irresponsible for me – with the first $350bn already spent – to enter into administration without any potential ammunition.”….

In a bid to ward off a vote of disapproval, Lawrence Summers, incoming National Economic Council director, on Monday sent a letter to congressional leaders promising greater transparency and more restrictions on banks receiving bail-out funds – including constraints on dividend payouts and on takeover activity.

Note the formula that appears in the Times: “At Obama’s Urging, Bush to Seek Rest of Bailout Funds.” I have some colleagues who have ringside seats, and this was staged. We have the appearance of bi-partisanship, but Obama is bending over backwards to prevent a slugfest. Or so I have been told. Key section:

The decision to request the money now reflects the calculation by Mr. Obama and his aides that it would be better to have both the incoming and outgoing presidents urging lawmakers to release the money, given the high level of anger and frustration on Capitol Hill over how the Bush administration has managed the bailout program.

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  1. Anonymous

    I’m disappointed in this analysis.
    Obama is, and will be governed by the same masters which pull Bushes strings.

    You somehow have bought into this ‘change’ nonsense. Barney Frank and Obama talk the talk, but both are cynical one dimensional characters.
    Do you really think Frank was so innocent as to give Paulson a no strings attached blank check? Of course he knew what he was doing.

    These people are INCAPABLE of walking the walk.

    Do you actually think that beyond a handful of outcasts your politicians are public servants?

    So I’m not sure why you’re despondent. ALL SERVE THEIR MASTERS!

    P.S It’s cruel of you to place your cat in tupperware!

  2. Yves Smith

    I have made it pretty clear that I am disappointed in Obama, not that I had high hopes for him (I was singularly unhappy with the options on offer this year). His choices for his economics team have said he is going to continue the status quo with somewhat better optics than the Bushies.

    As for the cat, it is not mine, and the reader told me that the cat CHOOSES to sleep in Tupperware. He used to sleep in a sink, so the form factor is familiar.

  3. Anonymous

    I think you’re reading of the politics is off here. The bailout was and is extremely unpopular, to the point where John McCain may very well made a go of it, if he had come out against.

    I think actually Obama is trying to get Bush to get the money, so he doesnt have to do it. Bush made him publicly come out for it, before he’d ask.

    There’s a possibility, though probably low, this could be rejected by the Congress and Bush would have to veto. I doubt it however, as everyone was just reelected.

    Remember the coalition which opposed the bailout in the House was Reps and liberal Democrats, where the so-called middle was panicked and still remain under the spell of our establishment economists. We’ll see where things are in June.

    But the Obama team wants this money with no strings as much as Bush’s, Larry Summers is responsible for this whole mess as much as Bush, Greenspan, Bernanke and Paulson.

  4. john bougearel

    Hi Yves,

    It should not go unnoticed in this post, since we are hanging Bush’s manipulative machinations out on the clothesline to air out a bit, he also manipulated the treasury markets sharply higher into year-end by dragging his feet on those automaker loans. Between Congress kicking the can, and bushie’s feet-dragging corp credit spreads widened to record levels as the prospect of widespread bankruptcies had to be priced into the market. The only safe bond was a treasury bond. And guess who that benefited? It benefited the damn banks we just bailed out with $700 billion of TARP funds. How it was done was simple, the Fed exchanged US treasuries for banks rotting collateral in Q4 08. Add some can-kicking and feet-dragging, and you have the perfect prescript to give a huge boost to the Q4 bottom line of zombie financials

  5. Yves Smith

    Given that Elizabeth Warren is asking lots of embarrassing questions and writing “take no prisoners” reports, no stings attached is going to go down badly, whether this is voted through on Bush’s watch or Obama’s.

    Forcing it through now is causing undue consternation. With all the stuff that Obama will be moving through Congress in his first month, this (even though it would have created some friction) would have gone through easier then than now. He could very easily have put a few cosmetic restrictions on to appease the Dems (look, they are having to do that now anyhow).

    I think the Republicans had hoped that they could get it through without extra restrictions if Obama signed up. That was the ploy. It backfired. Why Obama would agree is beyond me, unless per your surmise, he wanted the onus on the Bushies. But passing it this week allows the Bushies to throw a lot more dough out as their final act.

    The Democrats I know with inside G2 think Obama botched this one. FWIW. But they are being cloak and dagger about what they tell me.

    The pushback was too great. But Obama having sent Summers out to do the rounds, can’t back down now. Looks weak.

  6. ndk

    I think actually Obama is trying to get Bush to get the money, so he doesnt have to do it. Bush made him publicly come out for it, before he’d ask.

    This strikes me as the most likely explanation as well, 11:21.

    As far as the drop in stocks goes, it was hardly alone. Commodities (grains — owch) took it on the chin particularly hard, as the dollar and yen rose again. I see nothing new or interesting here.

    It’s just the same old pbbbltlth sound of unwinding. I expect to be listening to it until China and Japan break their pegs or begin to experience significant inflation. That is to say, I expect to hear it for awhile.

  7. john bougearel

    Obama absolutely botched this one, he was hoodwinked. And to think he got hoodwinked this easily even before his term begins does not set a good or hopeful precedent.

    And bush gets to disown the responsibility for the second half of TARP. There is no onus on Bush, thsi is entirely on Obama, because Obama asked him for the relief appropriation.

  8. joe c

    “this (even though it would have created some friction) would have gone through easier then than now.”

    This where I think you’re off, don’t underestimate how unpopular the bailout is, its radioactive. Obama is polling.

  9. john bougearel

    And yes, (now that I read the whole post), brinkmanship is a perfect description to pushing the auto crisis practically to disaster a few weeks back…but right now there is no “crisis” that needs any immediate dousing ahead of Jan 20. So, yes, it must just be aimed at spending the whole wad and nothing less before Obama takes reign

  10. john bougearel

    OH, and since this post is rankling/prattling on about how horrible Q4 08 earnings will be for financials (aided and abetted by Meridith Whitney) I suggest to you that they will prove to be overblown (at least for this quarter) due to a one-off situation.

    (I have a twisted theory: financials may report much better than expected because after the banks dumped their mbs’ onto the Fed for which they received treasuries, treasury prices all along the curve were manipulated sharply higher in Q4 08. Kind of a crazy idea, but one that bears watching for its potentiality.)

  11. Yves Smith

    joe c,

    I beg to differ. Look at the Times headline and first paragraphs of the article. The Bushies completely hosed Obama. He asked for it, they will have a last crack at the money. Brilliant, I have to concede.

    john b,

    If you are right (I see earnings being disappointing) and financials come in better than low expectations (particularly since full year financials are audited), you will see a big rally, given extra juice by short covering. Sentiment has taken a big turn in the last few days.

  12. David

    Ah oh! You committed the cardinal sin

    “I am as bearish as just about anyone, but there is a huge amount of cash sitting on the sidelines right now..”

    That is the sideline myth. There is never any change in sideline cash. If hedge funds or mutual fund investors pull money out of stocks and equal an opposite amount of cash flows into them. It is just someone else, maybe institutional investors or foreign investors. The amount of cash on the sidelines never changes.

  13. Anonymous

    Your distaste for Bush is leading you jump to strange conclusions. I think we can take this at face value.

    Obama wants to hit the ground running; as a courtesy, and by Obama’s explicit request, Bush is putting in the request for him, one week in advance. Obama wants a stimulus maximus ASAP, and this is very much in keeping with that.

    If Bush had actually wanted to spend the money himself, he would have done so before his final week. Note the new Democrat-dominated Congress has already been sworn in, in early January. They are extremely unlikely to pass anything that Obama does not personally approve of.

  14. Yves Smith

    Wrong. From Bloomberg December 29:

    There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.

    The $8.85 trillion held in cash, bank deposits and money- market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.

  15. Yves Smith

    And perhaps as important, cash allocation within equity mutual funds are at atypically high levels. Those guys are supposed to be pretty fully invested most of the time. Too much cash is a big no no in that game.

    Believe me, I am convinced we see the S&P at 500 before this is over, but I expect there to be lots of wild swings on the way.

  16. Yves Smith

    Anon of 12:17 PM,

    There have been complaints that Paulson has already gone into the second $350 billion. He has ALLOCATED more with inclusion of the GM bailout, but not all the checks have been written (the last tally I saw was only something north of $200 billion had actually been dispersed).

    In addition, I am certain Obama could have gotten this through very quickly, within the first three weeks. An incoming president can take a lot of ground, but Obama seems unwilling to use his political capital when he has the most. This is unwise. It erodes over time.

    And if he operates on the Bush interpretation, he still has $100+ billion in reserve (as in the dough has not left the Treasury). There are no disasters pending (save perhaps Citi, and the last hiccup there was finessed with very little TARP money. Even another injection would not use up the unspent balance of the first tranche of TARP funds).

  17. mmckinl

    Bush tanking stocks ? ….. No …

    The fall in the stock market is completely understood as more de-leveraging … It has been expected for weeks.

    The Madoff scam has sent the owners of hedge fund and investment funds scurrying for their money. Stocks and bonds will have to be sold.

    The banks are hoarding cash to cover their increasingly underwater toxic derivatives.

    This is Bush panicking as he knows stocks will be crashing and he wants to show he did not do it intentionally. Bush is in deep caca with all his fathers friends, the guys that were going to give him a job … lol !

    Stocks ? …….. Look out below !

  18. Yves Smith


    I am not big on a lot of trading pattern type analyses, but a reader (who is a successful investor) sent me a chart from JP Morgan showing money market mutual fund cash as a % of the Wiltshire 5000. It is 5 standard deviations above the historical average of 16%. And while normalish levels or changes around them don’t mean much, past peaks have correlated with meaningful stock market rallies.

    In other words, trying to make too much of day to day patterns may not tell you much, but when anything moves to an extreme level, it is worth taking note of it.

  19. Yves Smith


    I am being more than a tad facetious, but I think that was the leverage Bush had over Obama, that a fight over the TARP would freak the markets out. Otherwise, this makes no sense. The NY Times and Reuters both have headlines saying Obama, not Bush, asked for the release of the TARP money, so the “doing this on Bush’s watch” theory makes no sense, nor does there, per the discussion above, seem to be any reason for him to need the money now versus a month from now.

    I am willing to hear other theories, but the two most obvious ones don’t seem to add up.

  20. john bougearel


    I am with the gang on this cash-on-the-sidelines argument. The talking heads used that throughout 2008 as a rational to buy stocks.

    Now,too much cash is a big no-no. In fact, the big houses mandate 90% allocation to stocks and bonds at all times so that their clients are all in. But this is just at the weatlth mgmt or mutual fund levels.

    The problem with the rational is that the cash on the sidelines can continue to grow as it has all throughout 2008 until the SP500 hits a valuation level that makes some sort of sense to put money aggressively to work. And until there is a reasonable valuation level (and I mean below 10 ttm)is reached to trigger aggressive buying, that money on the sideline will just sit there and grow and grow and grow, like high-cotton in the summertime.

    There is no mechanism to trigger the smart money yet (maybe at 500, it would but it will take another crisis to get there, and our new crisis mgmt will do all they can to prevent the next big crisis). At the very least, this extreme deflation and a real earnings trough (not just these one-off false signals we may be getting – in fact, I am counting on a series of false signals generating the next big bull trap) will have to stop before it can even be considered.

  21. Steve

    As Thomas Schelling likes to point out, one of the very few things that economists know for certain is that as much cash flows out of the market as into it.

  22. mmckinl

    Yves Smith

    I’m much more pessimistic than you. I don’t see all this money on the sidelines. I see severe deflation that is crashing the money supply.

    The next shoe to drop will be the treasury bubble which will destroy even more capital … in the meantime it’s ever down ward for the markets.

    I thought as most that there would be a first quarter rally, but I’m positive that Madoff killed that idea.

    As far as the banks Obama is in bed with the bankers just as Bush was. Just look at Obama’s team … all Rubinites! Obama is part and parcel of the Ivy League oligarchy.

  23. john bougearel

    Put another way, no matter how much the hot money is itching to be put to work (beyond their 0 returns in mmmf’s), there must be trigger to tickle their animal spirits and shed their risk-averse posturing

  24. Anonymous

    You guys are a bit out of line here. First, Yves did say that stock mutual funds are cash heavy. Those guys are paid to pick stocks, not to sit in cash. They will lower their cash allocation.

    And money market yields are really low. As long as things look a bit scary, I can see most retail investors staying heavily in cash, but a lot of them will get unhappy with the low yields. Maybe they buy short term bonds, maybe they buy munis, maybe they dabble in currencies, but they are not going to stay that heavily in cash. Look at the Japanese. Their retail investors turned into manic currency traders. Maybe our money starts to go overseas. I don’t have the answer, but once investors get out of deer in the headlights mode, they will (cautiously) start putting money to work.

  25. joe c

    This is from the WSJ:

    Mr. Obama, speaking to reporters Monday, said he asked Mr. Bush to request the remaining money because he didn’t want to be caught without emergency funds if financial markets weaken further. The initial $350 billion is already committed to institutions and programs.

    “In consultation with the business community and my top economic advisers, it is clear that the financial system, although improved from where it was in September, is still fragile,” Mr. Obama said. “I felt that it would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system.”

    # # #

    I dont think the first thing Obama wanted to do as president is ask for the rest of the bailout. I’m no fan of Bush.

    I’d suggest this bodes ill for upcoming statements.

    Frankly, I think this shows the whole thing has been a disaster — the fact is many of our most august financial institutions are insolvent, and until we own up to it, nothing good is going to happen

  26. john bougearel

    All that said, consider the tone of the outright bearishness on this discussion board (yours truly included) and consider if we might not be leaning a bit offsides here if there are upside surprises. (btw, Madoff was a lagging indicator folks, so best you toss that out of your thinking)

    So, I don’t discount a rally unfolding in the stock market at some point in Q1 at all. But, any rally that does unfold is apt to be a false start, initiated on faulty premises (valid premises are found sorely wanting) and not because of some cash on the sideline rationale.

  27. eh

    I have made it pretty clear that I am disappointed in Obama,…

    Why? What is he except a no term senator whose person and candidacy was hyped by the media out of mostly political correctness? What are his legislative accomplishments? He seems to have mostly spent his time shilling for underclass Blacks, putting out all the usual tiresome rhetoric to explain their predicament and justify his (ostensibly unselfish) efforts on their behalf, when it seems just as likely his energies were channeled there also partly out of raw political ambition of the most cynical and calculating kind — remember, we’re talking about Chicago here.

    Anyway I’ve always taken a wait and see attitude about him. And so far I haven’t seen much. Personally I think his whole infrastructure/stimulus schtick is absurd because those types of projects take a long time to plan and be approved — too long to make any sort of impact soon. Not to mention the additional debt.

  28. Yves Smith

    joe c,

    I am very loath to take politics at face value, and some people I know who speak directly to Congressmen on the key financial committees have winked and nodded to me that something very peculiar was afoot here. They are not saying more. Others who are not so close but are close readers of the tea leaves say Obama was had.

    As I indicated above, Obama could have taken the same view that Pauson did, that the number that matters was the expenditure, not the amount committed, and using that theory, he has more than $100 billion of powder dry. There is no reason to rush. With all the legislation Obama will be pushing through, this would have been a sideshow. Happening in this quiet transition week, this is getting MORE press than it would have otherwise. How is this a plus for Obama?


    Money supply is not crashing, M1 grew 11.8% last year, and M2, 8.1%.

  29. mmckinl

    To All …

    Just take a look at Citi Bank …

    It is ready to implode … the first of a few Wall Street Banks that will implode …

    The Wall Street Banks were last summer hoping against hope that the economy would rally. It has crashed …. Wall Street banks are largely insolvent and some are leagues underwater. Citi is just the first.

    Until there is a Bank Holiday to sort the books the carnage will continue … but you won’t hear any economists say that eh Yves?

  30. Yves Smith

    I said I expect the S&P to hit 500 and everyone is upset that I say there might be a rally? Sentiment has turned so bearish that it almost begs for a rally. Look at the record of the Great Depression. There were a lot of monster rallies as well as gut-wrenching declines. My dim recollection is one was 50%. We haven't seen anything like that. Not that I am calling one here, I don't do that, but I am making a more general point.

  31. David

    With the “cash on the sidelines” thing, you need to realize that it is true by definition that money never flows in or out of the stock market. Stock go up or down because of changing preferences of what the “right” price is that balances the number of buyers and sellers.

    So if Bloomberg or someone says that some group of investors are heavily in cash, then by definition the groups they are NOT looking at are heavily in stocks. The stocks didn’t go anywhere. Some one owns them at any one time and the amount of sideline cash can’t change by buying and selling them.

    That isn’t to say that these numbers are meaningless. It is possible in principle that stock prices are correlated with which group is heavily invested in them. But I doubt those numbers have much meaning. This is clearly a fairly unique economic event. The only things comparable such as the Great Depression occurred when the market structure was completely different (i.e. No Japanese pension funds available to buy US stocks).

  32. mmckinl

    Yves Smith said…


    Money supply is not crashing, M1 grew 11.8% last year, and M2, 8.1%.


    Money supply means zip without velocity … and velocity is crashing … then there is the evaporation of credit …

  33. joe c

    Because it got Bush to ask for it, as opposed to him and I would think they have got the votes to get it soon, maybe part of the deal? It makes no sense for Obama to come out for this now otherwise.

    I can tell you out in the hinterlands away from NY and DC, the bail out is political poison. Everyone was too scared to use it this election.

    Obama got rolled before getting into office? Phew, that would indeed be something and certainly bad news for Democrats of all persuasions. Though par for the course for the Democratic party we’ve come to know over the last couple decades.

  34. Anonymous

    I participate only occasionally here, and I have to say this thread is pointlessly argumentative. Is it the full moon?

    Like mmcknl just now, you got snippy. Yves corrected what you said, but you had to have the last word,

  35. Yves Smith

    joe c,

    That is precisely what I am afraid of. Even though Bush technically is making the request, both the NY Times and Reuters have in their headlines that Obama made the request. I don’t watch TV, so I cannot tell how it is playing there.

    Another sign: my political buddies are telling me the Obama crowd thinks they did a good job in getting 60% of their stimulus wish plan through, This with the Dems having meaningful majorities in both houses of Congress. Reagan got 75%+ of what he wanted. He has higher expectations and pushed harder.

  36. bg

    I am going to weigh in on the side of the mob picking on Yves. Ok, so there is 5 standard deviations from the mean on liquid money. And you use the sidelines metaphor, which we can argue all day where the money is, but it does imply intent. You are assuming two things, first that fast money is waiting for reinvestment in assets, and second that reversion to the mean forces grow with distance.

    I believe that 5 standard deviations is past the point of regression, and points to a breakdown. At that point on the bell curve, the data is pure kurtosis. In this case I believe the breakdwon is the clear expectation of deflation. Most are not comfortable trading rallies, and are waiting for a safe re-entry, and are willing to accept negative real returns to be safe. The long treasuries is evidence of the deflation fear, and if you wanted to bet against deflation you can do far better in the bond market than you can in the stock market.

    As for technical analysis, we are clearly still in a bear market, even if you call november as the low (which I do not). Bear markets are typified by resistance at previous highs, and falling lows, and (for me most critically) rapidly decreasing volatility leading into declines.

    I think the 20% from 750 to 900 was a pretty good rally by any standard. The market sentiment does not feel as bearish as you imply to me, it has been shrugging off some frightening data. We have gotten the holidays off from crisis, but there will likely be another precipitating crisis (citi, and BofA feel right to me, plus some big name bug time surprise on earnings (GE?)) to shock people. Maybe after innaug.

    I have beefed up by puts on the lower volatility, and think the current decline will have legs, especially for financials.

  37. joe c

    Well, Obama has proved he’s clever, whether he’s wise? But try this one.

    The boys both Bush’s and Obama’s are saying, we need the rest of the money. Citi’s hemorrhaging, the regionals are starting to look bad with commercial real esate tanking….go down the list.

    Summers says we need the money. Paulson says well ask when you get in. Obamas go no, no, no, many Reps are wavering, we need Pres, and of course we dont want to make it first ask of administration.

    So Paulson, who’s abortion this is, says ok we’ll ask as long as Obama comes out too.

    Obama says great and get it passed by Monday and everyone will forget about it with inaugural.

    Hah, that’s the “good” Obama argument and the bad is your’s, he got rolled. Well we’ll see soon enough.

  38. Anonymous


    You just proved my point AGAIN.

    It is obvious what you did, but I will spell it out since you insist.

    You said “I see severe deflation that is crashing the money supply.” Yves gave you stats that showed your statement was incorrect.

    You then said money supply wasn’t relevant, that velocity had collapsed. That is a different argument, not the one you made earlier. You had your original facts wrong.

  39. Anonymous

    This is 1:48. bg, you must be short. You are way too insistent. Even Marc Faber says the market might rally before it goes lower.

  40. mmckinl

    Anonymous said…

    You said “I see severe deflation that is crashing the money supply.” Yves gave you stats that showed your statement was incorrect.

    You then said money supply wasn’t relevant, that velocity had collapsed. That is a different argument, not the one you made earlier. You had your original facts wrong.


    I would submit that it is money stock that Yves is talking about not money supply …

    Velocity times the money stock is the money supply …

  41. bg

    “Money supply means zip without velocity “

    I liked the intent, but not the choice of words.

    How about “rapidly declining velocity will sterilize any increase in money supply.”

    or even “sudden changes in velocity make it hard to drive conclusions from money supply.”

    or even “M1 always rises during deleveraging, and this is why you need to look at M3, which is not as well understood.”

    or even “economists don’t know what they are talking about.”

    that was fun :)

  42. cap vandal

    If the truly inside insiders think that Obama got taken, so be it. I’m inclined to agree that the TARP is unpopular enough that Obama is better off getting it done now.

    Today’s suggestions that TARP 2’s recipients only pay de minimus dividends and that TARP funds only be used to take over weaker banks seems sensible enough.

    Elisabeth Warren’s idea that the TARP money be rigorously tracked indicates a problem with the basics of accounting — given that money is fungible. It goes in as additional capital and it is impossible to trace the serial numbers to a specific loan. Although that didn’t keep JPM from saying that they are using $5 billion of it for loans to non profits and health care providers, when asked by the AP.

  43. Anonymous


    With all due respect, you are being pedantic. M1 and M2 ARE measures of money supply. You cannot revert to pet definitions.

    Why do you have to make a Federal case about this? You made an error, but your broader points is defensible. So incorporate the new facts rather than waste energy on defending your initial misstatement.

  44. Anonymous

    Could you explain exactly what “cash on the sidelines” means? Where did it comes from? Where will it go when it leaves the sidelines? Apart from IPOs, no money actually enters or leaves the market; for every buy there’s a sell of the same amount. And there’s been much deleveraging, which I would think would reduce the available cash for investment. I’m sure what you say makes sense, I just have never been able to parse this particular phrase, and would very much appreciate it if you would educate me.

  45. mmckinl

    Anonymous said…

    With all due respect, you are being pedantic. M1 and M2 ARE measures of money supply. You cannot revert to pet definitions.


    Then, pray tell what is the term for the money supply times the velocity ?

  46. bg

    Anon 1:48,

    “You are way too insistent”

    Yes, I have a dog in the race.

    There is always an interesting paradox in arguing your book.

    Are you more credible, because you are betting your own money, or are you less credible because you are trying to convince others you did the right thing?

    I just starting to lay in these bets the last couple of days, so I feel pretty strongly. But of course there is always the real and constant possibility of getting it completely wrong. It helps me to discuss my opinions, but if I am turning into one of those guys on yahoo finance pounding an opinion, I will try to tone it down.

  47. Anonymous

    2:48, that is not what Yves said. She mentioned cash, as in money market mutual fund cash and cash holdings in equity funds, not anything to do with margin.

    You can disagree, but at least do the dignity of dealing with what she actually said.

  48. Andy

    My bet is after making the right “noises” the funds will be released. More wasteful spending to ensue. Atleast all this spending is creating jobs for lots of Obama-ites.

  49. FairEconomist

    Re “cash on the sidelines”:

    As several have pointed out, buying and selling stock neither creates nor destroys either money or shares of stock. This is the basis of “cash on the sidelines is a myth”. However, buying and selling stock *can* change the price of stocks, and thus the ratio of cash to total stock value.

    A high cash/stock value ration can change the price, via preferred allocations. Suppose everybody wants to be 10% in cash and 90% in stock. However, the values in the economy are 15% cash and 85% stock. What’s going to happen? Everybody runs out to buy stock to hit their portfolio targets. Number of shares doesn’t change; money supply doesn’t change; *but* the price of stocks will rise by about 50%, at which point everybody will be at their 10:90 ratio and stop bidding up stocks. This is the basis of “cash on the sidelines is an indicator”.

    We’ve just seen huge declines in stock values and substantial increases in the money supply. The both increase the “cash on the sidelines” indicators. If the average investor demands typical pre-crash stock:cash ratio the price of stocks must increase, a lot. However, a lot of investors are much more cautious (including me, my mother, husband, and mother-in-law), now demanding a higher cash:stock ratio, and that will hold prices down. Which effect is more dominant? Could be either; hard to say.

  50. Anonymous

    Can you guys back off Yves? I’m not sure anyone really know (or cares for that matter) what they’re really arguing about, and she goes to a lot of trouble to put this great blog out with some great analysis.

    Can we leave the “sideline cash” argument alone?

  51. Anonymous

    Yves, I get the feeling you didn’t read either the piece by Shedlock or the one by Hussman. It’s impossible for money to enter the market except in the form of an IPO. The cash on the sideline idea is a huge fallacy.

    You can understand this pretty easily with a simple thought experiment. Me and you on an island with one stock ISLD, and two dollar notes. Cash is never “sitting on the sidelines”. It’s just the same money bidding or not bidding for the stock.

  52. FairEconomist

    You can call “cash on the sidelines” a myth, but as I pointed out above, the indicator Yves is using “does* predict stock price changes *if* sentiment is unchanged. Sentiment has changed, so the outcome is unclear, but Yves isn’t pushing a myth. At worst, she’s pushing an inaccurate explanation.

  53. Jimmy Linte

    Can you guys give Yves a break..she’s probably tired from all the work of maintaining this wonderful blog. You guys try maintaining a blog of this quality day in day would’nt last a week.If you want to contribute to the discussion, by all means, but in a constructive non-nasty way. Thank you.

  54. Anonymous

    I’m wondering about Big Blue. Yes that Big Blue. You know the one hardly anyone mentions these days because they’re too concerned with the Bernie Madoff’s.

    I have to think that IBM may be a size 16EEE Florsheim about to hit the gilded marble floor anytime now with one hell of a resounding thud. Who can afford to buy mainframes much less get the credit to buy them?

    And while we’re at it GE could be the left side of a Florsheim duo considering the last time I checked turbines probably aren’t on everybody’s shopping list these days. But what do I know.


  55. Anonymous

    Of course there can be sideline cash. Hussman’s analysis assumes a fixed monetary situation. It ignores credit creation and government bailouts.

    All that toxic waste tranfer to the Fed balance sheet has put cash on the sidelines. I leave it as an exercise to the reader to figure out how that works.

  56. donebenson

    I have worked in the markets since the mid 60’s, and have lived thru the 1966, 1973-74, 1976-77, 1980-82,1987,1990-91,1998,2000-2002, and the current bear markets. In all of the recoveries from those bear markets, ‘cash on the sidelines’ played a meaningful role in pushing the markets higher.

    Yves, much earlier in these comments, pointed out the % of cash relative to the value of stocks being exceeding high. THAT is what is meant by ‘cash on the sidelines.’

    While it is theoretically correct to say there has to be a buyer for ever seller, it is the relative amount of ‘cash’ relative to the market value of stocks which is relevant.

    I, too, am bearish, but it is ALWAYS possible to have a temporary rally, the timing of which, or the size of which, will surprise us.

    Anyone who tries to tell the market what to do is not capable of being a successful investor.

  57. Glen

    Florsheim, nice shoes, very comfortable. If your going to hit the floor, do it in Florsheim.

    Obama’s pushing Bush to dish the cash – “Wasn’t me. Told your TARP was CRAP. Another failed legacy”

  58. Anonymous

    There would apear to be a few possibilities here. The first is that a large institution will need lots of bailout money soon. The second is that the treasury has run out of bailout money. The third is that this is a way to side step some of the considerations that congress wants.

    The quote we get from Obama is

    I felt that it would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or a weakening of the financial system,”.

    No ammunition means to me that the treasury coffers are somewhat depleted. With bid to cover ratios at US treasury auctions begining to drop off and the FED not yet actively printing and buying treasuries then they may have to cut back on the commerical paper purchases.

    Equally you could argue that they expect some sort of emergency or problems with the financial system. With talk in the UK of problems with trade credit insurance and premiums beginning to fall short of payouts perhaps the next shoe to fall is in the insurance business. Further problems for AIG perhaps ?
    Most likely is that they don’t want to much hinderance in where they throw the money and they see rushing this through as the best way to achieve that.

  59. ruetheday

    Or maybe Obama thinks that getting the stimulus package passed will be a long, drawn out process with lots of inter and intra party bickering, and thus wants funds available to use while that is sorting itself out.

  60. Anonymous

    agree that the same masters are pulling the strings but a bird in the hand… – look for a Sunday news conference to address JP’s dismal results

    I think the banksters are a bit jumpy with talk of re-directing the TARP to foolish things like housing

  61. Anonymous

    Its a good thing we have all this “cash” on the sidelines….we have a lot more “debt” on the sidelines too. Last i checked, people determined solvency by netting the two together. Whoever uses the “cash on the sidelines” arugment is just another talking head.

  62. Brent Buckner

    If the funds are released and a substantial portion is allocated by the Bush administration I will have higher estimates of the reliability of your sources going forward.

    Thank you for the opportunity.

  63. Charles Kiting

    Why would Obama push for accountability when he’s got a stimulus/bailout plan of his own? Thene there’s Frank who wants insolvent banks to lend while the banking regulators are saying otherwise.

    As long as there’s 350B hanging around, it becomes a bargaining chip for those who are against Obama (or his plan, or whatever).
    Bush’s fiscal restraint was close to nil for 8 years, so he was probably happy to have an excuse for one last wasteful fling. I also have a hard time fathoming Obama suddenly having a fit of accountability when it was Obama twisting arms in Congress to get the bailout passed after the initial vote was against it.

  64. S

    Cash on the sidelines, stocks rally,m but we go to 500 is as good an argyument against EMH as I have heard. Finally put the nail in that coffin.

    Bernanke speech this morning gives you a hint of why the need for the TARP pull. The three scenarios he outlines (1) capital injections, (2) good bank band bank, or (3) TARP like buying bad assets require far more capital than the remining dry powder. And yet there is no discussion of essetnially taking the equity to zero (what it is worth) a la the Swedes. Bernanke speech was a full scale PR event offering an empty defense against his flawed ideology and failed actions. If there was ever a case of Stockholm Syndrome this speech is it.

    In background hearing the kohn, the cantankerous old greenspan sidekick, now reported to be heading to NY Fed, is saying a bad bank model is now what we need. So the TARP was it as Bernanke then testified before congress,. Then the rates to zero was it. Now we need a bad bank.

    Bernanke and Kohn have it exactly wrong. We arleady have bad banks. They are all the receipients of TARP. What we need are new banks. The equity holders of all the banks should be taken to zero. Anything short is more taxpayer robbery.

  65. Anonymous

    Obama also has a master. Why some would think he would be above the system is beyond me.

    Citi is going under on January 22nd

    He can politik his position as much as he and his advisors wish but there is no mistaking who is pulling the strings.

  66. S

    Yves, why would you be shocked by this. And blaming Bush?

    Bush didn’t pick Geithner as I recall? Geithner was seated at the NY Fed in the engine room of intervention. He was behind the Bear Stearns bailout and he shared a board with the arrogant prick Fuld. Geithner of all people should have known what was happening at Lehman considering his front row seat. Jamie Dimon also shared that board and as memory serves he cut off credit (or was rumored to halt trading with lehman). geithner being in the middle of the den of theives had to be at the center of the TARP thinking. So that his team would want the money shouldn’t shokc you in the least.

    Geithner is a Rubin protege. As is Summers. They embody the ideolohgy that got us here. It wasn’t Bush by any stretch that created the structural issues that have gutted this economy. The structural adjustment for the US are a long time coming and the seeds of the crisis go back decades (pick your decade). You are better than blaming Bush. He continued the sad policy path of past adminsitrations that got us here – of course – but to lay it at his feet is just intellectually dishonest.

    Bernanke at this point is just a complete liability. if Obama had any sense he would draft bernanke resignation letter and instruct him to sign it ASAP.

  67. S

    Also, consider that populism is growing and this was likely reflected in the Bernanke speech and the TARP request. How much longer will Americans tolerate the government giving taxpayer money to bank shareholders? Better yet, will Obama tolerate it much longer?

    The bankers must know this. Dimon foreshadowed when he claimed he didn’t need the capital but did it anyway. The bankers are desperate to protect what they delusional think is equity. That is why BB is out with the populist rhetoric today about having to have healthy banks etc and system saving. That speech might be one of the most egregious volitions of public trust yet.

  68. Anonymous

    The politics point to this being a smart move by Obama, provided the Bush administration doesn’t use up the new cash in the next week. I think you (and your sources) are underestimating the political poison the word “TARP” represents to the average congressperson’s constiuents. No doubt congress would love to have the excuse to denounce it, and grandstand for populist gain. Let Bush take the heat.

    We’ll know the answer in a week…

  69. Anonymous

    Bush is cooperating with TeamObama’s request. That way all of the TARP shenanigans happened under Bush and Obama gets a fresh start. This is typical behavior. No one wants the new president to fail, including the current one. Stop being so cynical.

  70. Anonymous

    May I remind all the Obama Naysayers, he is STILL President ELECT Obama, not PRESIDENT Obama. Therefore, he us unable to make policy changes you idiots.

  71. Eric L. Prentis

    The spending of additional TARP funds under President-elect Obama will be no different than under President Bush. Obama’s economic team is Geithner/Summers/Bernanke, the spitting image of Bush’s team that bailed out the crooked bankers on Wall Street. Just more of the same, the rich get richer with the help of the on-the-take politicians.

  72. Eric L. Prentis

    Fed Chairman Bernanke has a megalomaniacal complex, he says, “my priority is to save global economies,” unbelievably, with US taxpayer money. If Bernanke wants to be a big hero why doesn’t he just get a real job rather than giving our money to the rich, failed bankers on Wall Street. Bernanke is a stooge for the financial ruling class who directs him to make a $2 trillion dollar money grab under the guise of trickle-down economics, bullsh*t.

  73. Anonymous

    Hi Yves,
    Now it looks like Obama is saying that he will veto his fellow democrats if they don’t give him the money.
    Whoever gave you inside information was either playing you or someone was playing them who just passed it on to you. Of course, this explains the origin of some of your politicial leanings. It appears to be inside misinformation.

    Regarding financial discussion though, you are top notch, bar none.

  74. Yves Smith

    Anon of 8:27 PM,

    With all due respect, did you read my comments in the thread above? I said, and the post clearly said, that Obama had asked Bush to push the TARP request through. This does NOT fit the “Obama wanted this on Buah’s hands” scenario, since a lot of media outleets are putting front and center that Obama asked for it.

    Now pray tell, since it won’t shift blame, why would Obama ask for the dough now? He could get it approved in a few weeks and it would get far less media attention with all the other new administration three ring circuses going on.

    And as I also said, the money has not been doled out, he could use the Paulson interpretation and spend another (guesstimate) $100 billion near term.

    So Bush/Paulson must have made noise about the state of the banks, Remember, the OCC and FDIC are under Treasury; the NY Fed (Geither) does not have much (any) regulatory role. I suspect the line was “gee if enough banks report crappy earnings, you may have to step in”

    Given that behemoth like Citi was rescued with minimal TARP dough, I don’t see the additional TARP as being necessary this nanosecond to rescue a bank. And the banks may or may not be in real trouble; it has been well discussed eslewhere that CDS can be used to make bear raids. If the institution is not having a run of depositiors or counterparties, but the stock is tanking, the justification to Do Something is awfully weak.

    Is it real? I tend to doubt the urgency. And per the Yahoo link, Obama’s name is getting more and more attached to this. So this is not working out to his advantage. And as I further said, I don’t see why C traded down on Rubin’s departure. He was part of the problem, it should have been seen as a plus.

    The case that Obama was rolled still hangs together.

  75. joebhed

    The creation of money
    “One of the most pervasive myths about the government deficit is that governments which spend more than they receive in revenue must borrow the difference, thus increasing the public debt.

    “In fact, a government can choose to create the needed additional money instead of borrowing it from the banks, the public, or foreigners.

    “Business and the conservatives in politics and the media are horrified by the suggestion that the government exercise its right to create more money. They claim it would precipitate another ruinous bout of inflation.

    “But money creation is money creation — whether by a private bank or the Treasury.”
    The creation of money
    “One of the most pervasive myths about the government deficit is that governments which spend more than they receive in revenue must borrow the difference, thus increasing the public debt.

    “In fact, a government can choose to create the needed additional money instead of borrowing it from the banks, the public, or foreigners.

    “Business and the conservatives in politics and the media are horrified by the suggestion that the government exercise its right to create more money. They claim it would precipitate another ruinous bout of inflation.

    “But money creation is money creation — whether by a private bank or the Treasury.”

    Plagiarized and abridged without permission from the social credit movement in Canada.

    Debt-free money.
    It’s OUR right.

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